Cost of debt

Cost of debt is what a company actually pays to borrow money, its interest rate, adjusted down to reflect that interest payments reduce a company's taxable income. That adjustment matters: a company paying a 5% interest rate doesn't really carry a 5% cost, since the tax savings from deducting that interest lowers the real burden.

Cost of debt is typically far lower than cost of equity, since lenders are repaid before shareholders and take on less risk as a result. It's the second of the two inputs, alongside cost of equity, that get blended into a company's overall cost of capital.